Introducing Depth of Market (DOM)

Depth of Market (DOM) provides traders with a measure of the number of pending buy and sell orders for a currency pairing at a range of different market prices. Depth of Market provides traders with information regarding of the amount of liquidity available at different market prices. The larger the volume of buy and sell orders at each price, the greater depth the market is said to have. Depth of Market is often referred to as the order book, due to the fact Depth of Market data shows the current pending orders for a currency or security. Depth of Market data is usually available from exchange for a fixed fee; however those trading Forex may be able to make use of Tier II Depth of Market data straight from their brokerage.

The Uses of Depth of Market Data

Scalping: Some traders who use scalping strategies use Depth of Market data to help them determine when they should enter in and out of positions. Depth of Market data is particularly useful to those who scalp as technical indicators and candlestick charts tend to be less reliable over shorter time frames. Very few traders base their short term trading decisions solely on Depth Market data, and instead use depth of market data alongside technical analysis and other trading tools. FXTM have produced a very good video outlining how Depth of Market data can be used by scalpers and short term traders.

Feel out the Market: Seeing Market Depth allows the trader to see order flow from the brokerages perspective, which offers traders with a unique look at the markets directional bias. Traders can keep an eye on order flow and begin to get a general feel of where the market might be headed.

Large Ticket Traders: Depth of Market data is also useful for those who are trading larger tickets (greater volume) as it allows them to see how much liquidity there is at each price level. VWAP (Volume Weighted Average Price) depth of market functionality is particularly useful for those who are placing very large trades as it allows them to see expected entry price instead of the quoted spot price. The majority of retail traders will find enough liquidity for their needs at every price level, but being able to see liquidity levels is still useful.

Depth of Market Functionality

Many STP/ECN brokerages will give their trader’s access to Tier II Depth of Market data for free. Some of the older trading platforms such as MetaTrader 4 do not have Depth of Market functionality built into them, meaning that brokerages using the platform have created separate programs which allow their traders to access Depth of Market data. When picking a STP/ECN brokerage it may be worth asking whether your brokerage can offer you access to Depth of Market data.

Newer platforms such as cTrader and MetaTrader 5 have Depth of Market functionality built into them, making it easier to access tier to Depth of Market data. cTrader from Spotware offers particularly impressive Depth of Market functionality with the platform displaying depth of market data in three different formats, depending on the traders particular needs.

Conclusion

Does it matter whether your brokerage gives you access to depth of market data? Well that depends, large ticket and short term traders will certainly benefit from having access to depth of market data. Smaller traders who take a more long term view will not find as much value in having access to depth of market data, but this is not to say that depth of market functionality wouldn’t be useful. An increasing number of brokerages are giving their traders access to Tier II DOM data, though many older platforms including the ever popular MetaTrader 4 do not have depth of market functionality built in. When picking a brokerage it is certainly worth asking whether they allow traders access to DOM data.